Tax Issues in Mergers Tax Issues in Mergers and Acquisitionsand Acquisitions

PresenterPresenterVIKRAM SINGH SANKHALA

What the present income-tax form needs What the present income-tax form needs is a section which would explain the is a section which would explain the explanations.explanations.

What do accountants suffer from that What do accountants suffer from that ordinary people don't?ordinary people don't?Depreciation.Depreciation.

Income tax is the fine you pay for Income tax is the fine you pay for thriving so fast.thriving so fast.

Where there's a will there's a tax Where there's a will there's a tax shelter.shelter.

Tongue in cheekTongue in cheek

Structure of the Structure of the PresentationPresentation

Domestic Tax ProvisionsDomestic Tax Provisions Basics of International Basics of International TaxationTaxation

Types of Restructuring Organic - Capital - Business Inorganic – Change in corporate entity

- Mergers & Amalgamations - Demergers - Acquisitions

TaxTax IssuesIssues

Meaning of Amalgamation Property Liabilities Shareholders

"amalgamation", in relation to companies, means "amalgamation", in relation to companies,

means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that

property (i) all the property of the

amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;

liabilities  (ii) all the liabilities of the

amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;

shareholders (iii) shareholders holding not less than [three-fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary)

become shareholders of the amalgamated company by virtue of the amalgamation,

Exceptions Acquisition by Purchase Distribution as a result of winding up

Amalgamation is a merger

Deemed Dividend u/s 2(22) The Transfer by a subsidiary company of its assets to its parent company in a scheme of amalgamation does not amount to deemed dividend

Capital Gains – Section 45 Section 47 (vi)- Any Transfer , in a scheme of amalgamation of a capital Asset by the amalgamating company to the amalgamated company if the Amalgamated company is an Indian company

Subsequent Transfer Section 49 (1)(iii)(e) Cost of Acquisition shall be deemed to be the

cost for which the previous owner of the property acquired it ,as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In case the asset became the property of the previous owner before 1-4-1981 , then assessee has the option of either cost to previous owner or fair market value on 1-4-1981.

Period for which the asset is held

Will include the period for which it is held by the previous owner

Indexation will be from the date of holding of share in the resulting company

Admissibility of certain expenses/allowances incurred by the amalgamated company to the amalgamating company

Investment Allowance s. 32A In case of acquisition of a ship/machinery/plant specified u/s 32A(2) there a deduction of 25% of the cost as investment allowance, subject to the fulfillment of certain conditions. This will pass through to the amalgamated company as long as the amalgamated company continues to fulfill such conditions of allowance

Development Allowance s. 33A(1) In respect to planting of Tea Bushes

Concession is transferred to amalgamated company if it continues to fulfill such conditions

Expenditure on scientific research s. 35

Certain capital expenditure under this head was allowable

Provision shall apply to amalgamated company if it continues to fulfill such conditions

Provision shall apply to amalgamated company if it continues to fulfill such conditions in the following cases also

Expenditure on patents and copyrights 35A Expenditure on Know how 35AB Capital expenditure on License to operate

Telecom Services 35ABB Amortisation of Preliminary Expenses 35D Amortisation of expenditure in case of

Amalgamation 35E – Mineral prospecting 42- Prospecting , Extraction or production of

Mineral oils

Depreciation Allowance WDV for the amalgamated company shall be the WDV of the block of assets as in the case of the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said previous year.

Benefits u/s 80IA , 10A , 10B

Would continue to the resulting company as if the amalgamation or de merger had not taken place

Would not be available to the amalgamating or de merging companies

Section 72A Accumulated losses and Unabsorbed depreciated

of the amalgamating company shall be deemed to be loss or depreciation of the amalgamated company and the provisions of the Act , relating to set off and carry forward shall apply.

However , to be eligible , both the amalgamating and amalgamated companies must fulfill certain conditions- 72A(2) a&b read with Rule 9C of the Income Tax Rules.

Benefit would be available for 8 years from the first year after Amalgamation.

Credit for tax paid Case Law –Modipon Ltd. Vs DCIT [1995] 54ITD 433(Del)

Benefit of any tax paid as Advance Tax or Tax deducted at Source of the amalgamating company would be available for adjustment against the income of the amalgamated company consequent inclusion of such income of the amalgamating company as income of the amalgamated company after amalgamation.

Demerger Defined u/s 2(19AA) of the IT Act, 1961

The companies Act allows as a part of a scheme of arrangement under sections 391 to 394 , or by process of sale of an undertaking.

The IT Act specifically excludes sale of an undertaking. This is covered under slump sale

Benefits under the IT Act Not treated as transfer u/s 47 hence gains on such transfer not chargeable under capital gains.

Depreciation benefits Section 35DD- Amortisation of expenditure incurred for demerger –one fifth

Amortisation of patents/copyrights expenditure

Expenditure on knowhow Expenditure on obtaining licence to operate Telecommunications Services –35ABB

Amortisation of certain Preliminary expenses

Deduction of Expenditure on prospecting etc.

Carry forward of losses and unabsorbed depreciation

Where directly relatable to transferred undertakings – entire amount

Where not directly relatable –apportioned based on proportion of assets retained and transferred

Demerged company will get the benefit only for the balance years unlike in the case of amalgamation

Any Transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company , will not be treated as a transfer of capital Asset for the determination of chargeable capital gains u/s 45

Slump Sale s. 50B Inserted w.e.f 1-4-2000 S.2(42C) Slump sale – sale for a lump sum consideration without values being assigned to individual assets and liabilities.

Taxed as capital gains Cost of acquisition and improvement shall be the net worth of the undertaking

International Taxation Transfer Pricing Thin Capitalization Offshore Financial Centres

Transfer Pricing

India s.92 USA Reg.482 Concept of Arms Length Price Methods –Transactional Price based and Transactional Profit based

Advance Pricing agreements

Thin Capitalization Interest versus Dividend payouts

Excessive use of debt over equity- Very high Leverage

Arms Length basis Reclassify as constructive Dividend

OFC’s or Tax Havens

Account for half the world’s Financial Transactions

Low or Nil Rate of Tax Treaty Havens Ring Fenced Tax structure Bermuda, Cayman Islands, Mauritius etc. Around 70 to 80

The End

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